U.S. arms makers post higher profit, decry budget cloudiness

Andrea Shalal-Esa

5 Min Read

WASHINGTON (Reuters) - Major U.S. weapons makers posted higher third-quarter profit on Wednesday despite budget cuts, their margins remained largely solid or rose in places, and revenue fell less than expected.

A visitor looks at a display of miniature Boeing passenger aircrafts at Aviation Expo China 2013 in Beijing in this September 25, 2013 file photo. REUTERS/Kim Kyung-Hoon/Files

But executives at the top four weapons makers - Lockheed Martin Corp (LMT.N), Boeing Co (BA.N), General Dynamics Corp (GD.N) and Northrop Grumman Corp (NOC.N) - said the outlook remains hazy given lingering uncertainty over defense budgets in the United States and abroad. Raytheon Co (RTN.N) is due to report earnings on Thursday.

The companies say they are weathering the initial stages of the downturn in military spending thanks to aggressive cost-cutting, workforce reductions and facility closures, and a sharper focus on executing contracts on time and on budget.

All the major players expect lower revenue and mounting pressure on margins unless Congress reverses a law that would cut Pentagon spending by $500 billion on top of $487 billion in cuts already planned for the next decade.

Phebe Novakovic, chief executive of General Dynamics, which builds U.S. Navy warships, combat vehicles and Gulfstream business jets, told analysts that the political brinkmanship over the U.S. debt ceiling and the recent government shutdown were sobering reminders that companies need to be cautious and hold on to cash.

“The government took the nation to the edge on the debt ceiling extension. We were forced to gaze into the abyss where we saw the full faith and credit of our principal customer at risk,” she told analysts on a conference call.

Novakovic said there was a chance that the entire showdown experience could be repeated in January when the debt ceiling is due to be breached again.

“It’s entirely possible that we find ourselves in an extended period of time trapped in Dante’s first circle of hell,” she said. “All of that suggests that we need prudence and caution ... until we can get a more stable plan from the government with respect to both the debt ceiling and funding.”

Novakovic said budget uncertainty had driven orders from the U.S. Army lower than expected, which was taking a toll on revenue at the company’s combat systems business. But she said the government shutdown and debt ceiling concerns were also making private companies reluctant to buy new business jets.

SHARES HIGHER

Executives at Northrop, Lockheed and Boeing raised similar concerns during their earnings calls with analysts.

Northrop Grumman Chief Executive Wes Bush forecast a further decline in revenue in 2014 given the uncertainty over funding levels and projected cuts in military spending, and said it was difficult to plan for investments and other projects.

Bush said he was particularly worried that the uncertain fiscal situation was depressing investment in the research and development efforts that underpinned the U.S. economy.

The repeated failure by Congress to enact proper budgets every year and to rely instead on so-called continuing resolutions to fund the government also has also had a negative effect, he said. It has effectively capped funding at the previous year’s levels and prevented the Pentagon from starting most new programs unless it received a special waiver.

“We need to return to a functional appropriations process in managing our country’s affairs, and ending the sequester should be a first step in that direction,” Bush said.

Shares of major weapons makers rose across the board on Wednesday with the exception of General Dynamics, which closed 2.2 percent lower at $86.23 amid concerns about its combat systems business, which saw quarterly revenues drop 30 percent.

General Dynamics reported higher overall earnings and operating margins for the third quarter and raised its full-year earnings forecast by 5 cents a share to a range of $6.90 to $7.00.

Lockheed shares rose 1.5 percent to close at a year high of $131.98 after the company reported higher earnings and lifted its earnings forecast for the full year.

Boeing shares rose 5.3 percent to close at $129.02 as the company reported a surprising 12 percent jump in quarterly profit and raised its full-year forecast. But Boeing’s military aircraft revenue fell 5 percent, and earnings in the defense, space and security division fell 19 percent.

Northrop shares ended 4 percent higher at $105.56 as the maker of Global Hawk unmanned planes posted an 18 percent increase in earnings per share despite a slight drop in sales, and raised its forecast for full-year sales.

Raytheon, which is expected to report results on Thursday, closed 3 percent higher at $78.49. The U.S. Navy on Wednesday ordered Raytheon to halt work on a new radar program worth up to $1.6 billion after Lockheed filed a protest against the contract award.